Note

– Stock Based Compensation –

Equity Incentive Plan

The Company previously granted options to its employees under its

2006

Stock Option Plan which expired on

December 22, 2016.

June 29, 2017,

the Company

’s shareholders approved its

2017

Equity Incentive Plan (the “Plan”). The Plan provides for the grant of various types of equity grants and awards, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other stock-based awards to eligible participants, which includes the Company’s employees, directors and consultants. The Plan has reserved

500,000

shares of common stock for grant, award or issuance to eligible participants, all of which

may

be subject to incentive stock option treatment. The Plan is administered by the Compensation Committee of the Company’s Board of Directors, which determines, within the provisions of the Plan, those eligible participants to whom, and the times at which, grants and awards will be made. As of

December 31, 2017,

awards have been granted under the Plan, and

500,000

shares of common stock remain available for grant.

Restricted Stock Awards

The Company issues restricted stock under various plans for certain officers and other key employees. The restricted stock awards

may

not

be sold or otherwise transferred until certain restrictions have lapsed. The holders of the

restricted stock receive dividends and have full voting rights with respect to those shares as of the date of grant. The compensation expense for these awards is determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares awarded and is recognized over the vesting period.

During the year ended

December 31, 2017,

the Company issued shares of restricted stock which vest in

three

equal installments over a period of

two

years. For the year en

ded

December 31, 2017,

the Company recognized

$129,000

in compensation costs related to restricted stock awards. At

December 31, 2017,

unrecognized share-based compensation associated with these awards totaled

$92,000.

The table below summarizes th

e restricted stock award activity for the period presented.

	Year Ended December 31, 201 7
				Weighted Averag e
	Share s			Grant Date Fair Valu e
Balance, at Beginning of Perio d		-		$	-
Grante d		12,981			17.00
Forfeite d		-			-
Earned and Issue d		(4,319	)		17.00

Balance, at End of Perio d		8,662		$	17.00

Stock Grants

During the year ended

December 31, 2017,

the Company issued a total of

4,410

shares of common stock to non-employee directors as inducement to their board service and a total of

1,000

shares of common stock to an employee as inducement to their employment.

The shares vested immediately upon issuance. The total stock-based compensation expense was determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares granted. Included in directors fees expense and compensation expense was

$75,000

and

$17,000,

respectively, during the year ended

December 31, 2017.

Stock Warrants

In connection with

the organization of the Company and the Bank, stock warrants were issued to organizers. The warrants

may

be exercised by the holders for the purchase of

101,000

shares of common stock of the Company at the exercise price of

$10

per share (warrant). The warrants were fully vested on

February 1, 2011

and were to expire in

2016.

The warrant agreements were amended effective

February 1, 2016

to extend the expiration time to

February 2, 2019

with

$48,000

of compensation cost recognized on the effective date.

December 31,

201

and

2016,

warrants for

87,625

shares at a weighted average exercise price of

$10.00

were outstanding. At

December 31, 2017,

all of the

87,625

outstanding warrants were vested and there was

unrecognized compensation. However, the amendment effective

February 1, 2016

extended the exercise period and retained the

$10

per share exercise price. As a result, in compliance

with Section

409A

of the Internal Revenue Code of

1986,

as amended, the “

optionality” of the warrants was eliminated thereby restricting the situations in which the warrants can be exercised to occur upon the earlier of (i) immediately prior to the

February 2, 2019

expiration date, (ii) a change in control of the Company or the Bank, (iii) the warrant holder’s death, (iv) the warrant holder becoming disabled, and (v) the warrant holder incurring a separation from the Company or the Bank (if the warrant holder is an employee of the Company or the Bank).

Using the Black-Scholes pricing model for the

7,625

shares (warrants) outstanding, the calculated value of

$2.50

per share (warrant) was estimated on the date of grant using the following assumptions: expected dividends of

1%,

expected life or term of

6.5

years, risk-free interest rate of

5.04%,

and expected volatility of

13.19%.

The expected volatility was estimated considering the historical volatility of an appropriate industry sector.

Stock Options

2006,

he Company established a stock option plan with

1,500,000

shares available to be granted as options under the plan. Under the provisions of the plan, the option price cannot be less than the fair value of the underlying common stock as of option grant date, and the maximum option term cannot exceed

ten

years. The

2006

Stock Option Plan expired on

December 22, 2016

and the Company is

longer permitted to issue additional stock options under this plan.

During the year ended

December 31,

201

total options of

50,000

were granted to officers and other key employees. The stock options granted were issued at an exercise price of

$17.65

per share for the year ended

December 31, 2016,

with a vesting period of

three

years. Compensation expense recognized as a result of vesting was approximately

$207,000

and

$240,000

2017

and

2016,

respectively.

The Company uses the Black-Scholes option pricing

model to estimate the calculated value of the various share-based awards with the following assumptions for the year ended

December 31, 2016.

There were

share-based awards for the year ended

December 31, 2017

since the Plan expired

December 22, 2016.

		201 6
Risk-Free Interest Rat e		1.36%
Expected Dividend Yiel d		1.18%
Expected Volatilit y		31.68%
Expected Life in Year s		5.0
Weighted Average Calculated Value of Options Grante d		$4.27

The following is an analysis of the activity related to the stock options:

	Yeas Ended December 31,
	2017					2016
	Number of			Weighted Average		Number of			Weighted Average
	Options			Exercise Price		Options			Exercise Price
Outstanding Options, at Beginning of Period		998,480		$	12.82		953,280		$	12.59
Granted		-			-		50,000			17.65
Exercised		-			-		-			-
Forfeited or Expired		(167,400	)		13.25		(4,800	)		17.11

Outstanding Options, at End of Period		831,080		$	12.73		998,480		$	12.82

Exerciseable, at End of Period		784,698		$	12.49		562,548		$	13.79

December 31,

2017,

options for

784,698

shares at a weighted average exercise price of

$12.49

were vested and exercisable, and there were

46,382

nonvested options and approximately

$210,000

of unrecognized compensation costs related to these options which is expected to be recognized over a period of

three

years.

December 2017,

the option agreements were amended for

105,250

options which were fully vested and set to expire in

December 2017

to extend the expiration date to

January 15, 2021.

Compensation cost of the

$63,0

was recognized on the effective date of the amendments. On

December 20, 2016

the option agreements were amended for

330,000

options which were fully vested and set to expire

December 22, 2016

to extend the expiration date to

January 15, 2020.

Compensation cost of

$168,000

was recognized on the effective date of the amendments. Since all of these amendments extended the exercise period and retained the original per share exercise price, the “optionality” was eliminated in compliance with Section

409A

of the Internal Revenue Code of

1986,

as amended, thereby restricting the situations in which the options can be exercised to occur upon the earlier of (i) immediately prior to the expiration date, (ii) a change in control of the Company or the Bank, (iii) the option holder’s death, (iv) the option holder becoming disabled, and (v) the option holder incurring a separation from the Company or the Bank (if the option holder is an employee of the Company or the Bank).